Dealing with debt

OPHIR GROSS | COLUMNIST

The start of the new year has provided an upward turn for the housing market as activity rises following the sudden shift we witnessed just nine months ago. Local real estate professionals and economists are noticing a substantial increase overall — an increase in homes listed for sale, pending transactions and, most importantly, buyer demand. While our market hasn’t returned to its heightened peak of buyer activity, as we saw in 2021 and early 2022, it’s projected to head back in that direction once interest rates begin to fall.

Before the demand frenzy shifts into full gear, it’s an ideal time for first-time home buyers to enter the market while competition is still limited. Discovering your buying power is one of the essential first steps of the home-buying process — facilitating your maximum buying power will provide you with more flexibility and comfort. To get the best possible loan option, credit, debt-to-income ratio and down payment are key determinants for lenders. The higher the credit score, the lower the debt-to-income ratio and the higher the down payment, the better mortgage loan you will obtain.

We will review the importance of, and tips for managing, your debt-to-income ratio for the most favorable loan option. Let’s begin with the basics. What is debt? According to The Economic Times, “when a party or corporation borrows money to make big purchases or investments that are normally unaffordable and has to be repaid within a certain time, along with interest, such borrowed sum is called debt.” Simply put, debt is any borrowed sum that needs to be repaid. And just to clear the air, debt isn’t inherently bad. You will always have debt in your lifetime, whether it’s from buying a house, a car, student loans, medical bills or an installment purchase. While some debt is better than others, how you manage your debts is equally important. The key is understanding how to utilize debt in your favor.

What is debt-to-income ratio?

According to Rocket Mortgage, “Your debt-to-income ratio, or DTI, is a percentage that tells lenders how much money you spend on monthly debt payments versus how much money you have coming into your household.”

Lenders look at how much debt you have compared to how much money you make monthly and determine what additional debt you can take on, given your current financial situation. While every financial institution varies on DTI requirements, the industry standard for a conventional loan can be as high as a 50% ratio. For FHA loans, those limits can go up to 57%. Lenders prefer to work with borrowers with lower DTI, as it implies you’re less likely to default on your loan. It is the responsibility of lending institutions to ensure the amount they approve you for isn’t going to push you over the edge and put you in a financial bind. For this reason, managing your debt is vital.

Before spending thousands of dollars to pay off your debts, always consult with a lender to see if those funds are better spent towards a downpayment instead of debt repayment. If a lender suggests your DTI is on the higher end, consider the following tips.

One approach is paying off your most expensive loan first — and by most expensive, I mean your loan with the highest interest rate. After that, begin repaying the loan with the next highest interest rate and so on. This method is known as the “avalanche method.” Another tactic is using the “snowball method” — begin by paying off your smallest balances first and then rolling that same payment towards your next smallest balance and then your next smallest balance. I think you’re getting the hang of it!

The key is always to be aware of the debt you are taking on, especially if you are planning on buying a house! Financing many different purchases will slowly add up. And when it comes to cosigning, the general rule of thumb is to stay away from it! Be cautious about cosigning for others, as their debt now becomes your debt. And if you are going to cosign, it’s vital to ensure the primary borrower makes all the payments for the first 12 months, as after that, lenders typically don’t count that debt as your own anymore.

While buyers begin to take advantage of the current market, it’s imperative you set yourself up to be just as competitive. Understanding your buying power and working towards the best possible loan scenario is the name of the game. You can do this by consulting with a lender and reviewing your credit and debt-toincome ratio. Remember, the more you know and are prepared, the smoother the home-buying process will be. JN

Ophir Gross is a realtor with Coldwell Banker Realty and has a combined skillset of business strategy and consumer psychology. She is a member of JNFuture Root Society, Women in Philanthropy, NowGen Phoenix, attends Congregation Beth Tefillah and began her roots in the community at the Phoenix Hebrew Academy and, formerly, Jess Schwartz High School. She can be reached at ophir. gross@cbrealty.com or 480-794-0807.